1. DSGAsia Time for Asia to take some Self-Responsibility Simon Ogus Rimrock Global Economic Summit May, 2011 simon@dsgasia.com; www.dsgasia.com Independent Asian Economic & Political Analysis

2. 2 DSGAsia’s Global Economic Assumptions  The US economy has received another double sugar shot but we would subsequently expect momentum to wane again as the steroids work off  The developed world remains enmeshed in an extended deleveraging cycle. Policy rates will remain low although this will not preclude periodic long bond sell-offs in response to short-lived inflation scares and bursts of economic activity  The bigger structural risks for bondholders remain, for now, credit-related. Post-quake, Japanese vulnerabilities have increased further but not to tipping point. Rather it is still Europe where debt restructurings and/or defaults seem all but inevitable. Timing is tougher to gauge  Developing Asia’s financial systems, by contrast, are in fine fettle and we are already seeing an upswing in the credit cycle. This is largely a response to negative real rates, in turn a function of continued exchange rate manipulation. Time to take some self-responsibility….  In fact, another external shock could be quite helpful for the region since many local central banks remain unwilling to tighten preemptively, or are politically-constrained from doing so  In the absence of exogenous accidents, Asian growth and inflation momentum will remain strong. Local asset markets could continue to perform well but make sure you pay for protection since across the globe fat tails continue to get fatter  At times when nothing bad is happening, near-zero rates are a powerful tailwind for risk assets. Nevertheless, financial systems remain highly unstable while market participants and businessmen are increasingly subject to the risk of arbitrary political events and interventions DSGAsia Independent Asian Economic & Political Analysis

3. 3 DSGAsia Independent Asian Economic & Political Analysis The Fed has been the focus but the ECB has turned itself into an even bigger SIV, albeit in a far more surreptitious manner. China is in a completely different league though

4. 4 DSGAsia Independent Asian Economic & Political Analysis Deleveraging will be a multi-year process. Shadow banking contractions dwarf central bank and on-balance sheet liquidity creation. Asia has no such constraints

5. 5 DSGAsia Independent Asian Economic & Political Analysis In poorer countries, food inflation is the core and rapidly impacts on expectations. Especially if there is ample monetary accommodation

6. 6 DSGAsia Independent Asian Economic & Political Analysis Who says that the Asian consumer has a cultural aversion to debt?

7. 7 DSGAsia Independent Asian Economic & Political Analysis China and India have been growing above potential and were reluctant to tighten at first. Of the two, India has done more and has the smaller liquidity overhang

8. 8 DSGAsia Independent Asian Economic & Political Analysis Chinese real lending rates are barely positive, especially for SOEs, By contrast higher borrowing costs are starting to bite in India

9. 9 DSGAsia Independent Asian Economic & Political Analysis It is true that private Chinese companies are paying higher rates and issuing significant paper in HK but the system as a whole is not contrained

10. 10 DSGAsia Independent Asian Economic & Political Analysis Barring further external shocks, Indian inflation should moderate. China may also succeed in “taming” inflation but more through statistical sleight of hand

11. 11 DSGAsia Independent Asian Economic & Political Analysis Rebalancing has been only partial thanks to widespread, unreconstructed mercantilism while decoupling remains more a hope than a reality

12. 12 DSGAsia Independent Asian Economic & Political Analysis The dollar seems cheap against the majors and in line with Asia. But the real divergences remain within continents. Divergent export performance is the result

13. 13 DSGAsia Independent Asian Economic & Political Analysis Japan is the champion government debtor but JGBs have a unique ownership pattern. It also has plenty of foreign assets to sell should the locals abandon ship Sectoral Holdings of Central Government Debt (December 2010)

14. 14 DSGAsia Independent Asian Economic & Political Analysis Japan should be thought of as a retirement home populated by rich people waiting to die. The question we always ponder is why the young have not been emigrating in droves

15. 15 DSGAsia Independent Asian Economic & Political Analysis Mrs Watanabe’s massive forex punts are a modern day myth. Home bias and low risk appetites remain the order of the day

16. 16 DSGAsia Independent Asian Economic & Political Analysis China may well be cyclically over-invested but it remains structurally under-invested. India even more so….

17. 17 DSGAsia Independent Asian Economic & Political Analysis Their railway build-outs are only beginning